Earnings Call Transcript - AGNC Q4 2025

Operator, Operator

Good morning, and welcome to AGNC Investment Corp's Fourth Quarter 2025 Shareholder Call. Please note this event is being recorded. I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Katie Wisecarver, Investor Relations

Thank you all for joining AGNC Investment Corp.'s Fourth Quarter 2025 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contain statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Peter Federico, President, CEO, and CIO

Good morning, everyone, and thank you for joining our fourth quarter earnings conference call. 2025 was an exceptional year for AGNC shareholders. AGNC's 11.6% economic return in the fourth quarter drove our impressive full-year economic return of 22.7%. Even more noteworthy, AGNC's total stock return in 2025 was 34.8% with dividends reinvested, nearly double the performance of the S&P 500. This outstanding performance on an absolute and relative basis clearly demonstrates the value of AGNC's actively managed portfolio of agency mortgage-backed securities and associated hedges. Looking back, we were confident that AGNC was on the forefront of a uniquely positive investment environment as the Fed's unprecedented tightening cycle of 2022 and 2023 reached its conclusion. On our third quarter earnings call in 2023, we expressed our belief that a durable and attractive investment environment for AGNC was emerging as mortgage spreads began to stabilize at historically attractive return levels. That outlook proved to be correct. And in the 9 quarters since that call and despite several episodes of extreme market turbulence, AGNC has generated an economic return of 50% for its shareholders, comprised of a 10% increase in book value and monthly dividends totaling $3.24 per share. Moreover, during that same time period, AGNC shareholders have experienced a total stock return of nearly 60% or 23% on an annualized basis. And finally, since inception, AGNC has generated a total stock return of over 11% on an annualized basis with dividends reinvested, demonstrating the long-term benefit of investing in this unique fixed income asset class and the durability of our business model across a wide range of market environments. Turning back to 2025, the Bloomberg Aggregate Agency Index was the best-performing fixed income sector in the fourth quarter and for the year, produced a total return of 8.6%. Also noteworthy, given the similar credit quality, the Agency Index outperformed the Treasury Index by 2.3 percentage points or 36% in 2025. As I discussed throughout the year, the favorable performance of Agency MBS was driven by a confluence of positive factors. First, the Fed shifted its monetary policy stance toward lower short-term rates and greater accommodation, a promising development for all fixed income assets. The Fed also transitioned its balance sheet activity from quantitative tightening to reserve management. Second, interest rate volatility trended lower throughout the year due to the shift in monetary policy, greater fiscal policy clarity, and a stable supply outlook for treasury securities which included a greater share of short-term debt. Lastly, the uncertainty and potential risks associated with GSE reform that adversely impacted the agency market early in the year gradually dissipated as the Treasury Department and other officials communicated an approach to GSE reform that focused on reducing the spread on agency mortgage-backed securities, maintaining mortgage market stability, and improving housing affordability. Collectively, these factors, combined with the sizable purchase of MBS by the GSEs later in the year, caused spreads to tighten and drove the substantial outperformance of Agency MBS relative to other fixed income asset classes. As we begin 2026, these favorable macro themes remain in place and provide a constructive investment backdrop for our business. In addition, other positive developments are possible including further actions by the administration to improve housing affordability. The recent $200 billion MBS purchase announcement is a good example of the type of action that could result in tighter mortgage spreads and lower mortgage rates. The funding market for Agency MBS has also improved in response to the Fed increasing the size of its balance sheet and improving the functionality of its standing repo program. The Fed is also considering other actions to further improve the utility of the standing repo program, which if implemented would be highly beneficial to the Agency MBS market. Finally, the supply and demand outlook for agency MBS remains well balanced. At current rate levels, the net new supply of Agency MBS this year is expected to be about $200 billion. When combined with the Fed's runoff, the private sector will have to absorb about $400 billion of MBS in 2026, an amount similar to the previous two years. On the demand side of the equation, however, the investor base today is more diversified and positioned to expand with GSE purchases potentially consuming about half of this year's supply. At the same time, bank, money manager, foreign investor, and REIT demand should all remain strong. Pulling this all together, the underlying fundamental and technical backdrop for Agency mortgage-backed securities continues to be favorable and supportive of our positive outlook. Moreover, as the largest pure-play agency mortgage REIT, we believe AGNC is very well positioned to generate compelling risk-adjusted returns with a substantial yield component for our shareholders. With that, I'll now turn the call over to Bernie Bell to discuss our financial performance.

Bernie Bell, Executive Vice President and CFO

Thank you, Peter. For the fourth quarter, AGNC reported comprehensive income of $0.89 per common share. Our economic return on tangible common equity was 11.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.60 increase in tangible net book value per share driven by lower interest rate volatility and tighter mortgage spreads to benchmark interest rates. As Peter mentioned, our full-year economic return was 22.7%, reflecting our monthly dividend totaling $1.44 per common share and a $0.47 increase in tangible net book value per share. As of late last week, our tangible net book value per common share was up about 4% for January or 3% net of our monthly dividend accrual. We ended the fourth quarter with leverage of 7.2x tangible equity, down from 7.6x at the end of the third quarter. Average leverage for the fourth quarter was 7.4x compared to 7.5x in the third quarter. In addition, we concluded the quarter with a very strong liquidity position of $7.6 billion in cash and unencumbered Agency MBS, representing 64% of tangible equity. Net spread and dollar roll income was unchanged for the quarter at $0.35 per common share, which includes $0.01 per share of expense related to year-end incentive compensation accrual adjustments. An important driver of our net spread and dollar roll income is the level of unhedged short-term debt in our funding mix as well as the composition of our hedge portfolio. As of the end of the fourth quarter, our hedge ratio was 77%, reflecting the level of swap and treasury hedges relative to total funding liabilities and was unchanged from the prior quarter. At the same time, during the fourth quarter, we opportunistically shifted our hedge mix toward a greater proportion of interest rate swaps. As a result, a meaningful portion of our funding remains short term and variable rate. This is consistent with the current more accommodative monetary policy environment and positions net spread and dollar roll income to benefit as additional rate cuts occur. Looking ahead, we expect that lower funding costs from the October and December rate cuts and anticipated future rate cuts, increased stability in funding markets resulting from recent Fed actions to maintain short-term rates within their target range, and the shift in our hedge mix toward a greater share of swap-based hedges will collectively provide a moderate tailwind to net spread and dollar roll income. The average projected life CPR of our portfolio increased 100 basis points to 9.6% at quarter end from 8.6% in the prior quarter due to lower mortgage rates. Actual CPRs averaged 9.7% for the quarter compared to 8.3% in the prior quarter. Lastly, during the fourth quarter, we issued $356 million of common equity through our at-the-market offering program at a significant premium to tangible book value per share. This brought total accretive common equity issuances for the year to approximately $2 billion and delivered exceptional book value accretion for our common shareholders. And with that, I'll now turn our call back over to Peter.

Peter Federico, President, CEO, and CIO

Thank you, Bernie. Before opening the call up to questions, I would like to provide a brief review of our portfolio. Agency spreads to both treasury and swap rates tightened across the coupon stack, especially on intermediate coupons as interest rate and spread volatility remained low and the demand for MBS, particularly from the GSEs accelerated. Hedge composition was also an important driver of performance as swap spreads on 5- and 10-year swaps widened significantly during the quarter. This favorable move in swap spreads followed the announcement of the Fed's revised supplemental leverage ratio requirement and the Fed's actions to ease repo funding pressure. As a result, Agency MBS hedged with longer-dated swap-based hedges performed considerably better than positions hedged with treasury-based hedges. Our asset portfolio totaled $95 billion at quarter end, up about $4 billion from the prior quarter as we fully deployed our new capital that we raised during the quarter. The percentage of our assets with some form of favorable prepayment attribute remains steady at 76%, while the weighted average coupon on our portfolio fell slightly to 5.12%. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $59 billion at quarter end. The composition of our portfolio also shifted toward a greater share of swap-based hedges. In duration dollar terms, our allocation to swap-based hedges increased to 70% of our portfolio from 59% the prior quarter. In light of our more favorable outlook for swap spreads, we will likely operate with a greater share of swap-based hedges in our hedge mix, particularly with short-term rates near the Fed's long-run neutral rate. With that, we'll now open the call up to your questions.

Operator, Operator

The first question comes from Bose George with KBW.

Bose George, Analyst

Can you just talk about where you see spreads currently versus where you saw it in the fourth quarter? And then just help us walk through the dividend coverage. Spreads are obviously tighter, but you've got more capital with higher book value. Just help us do the math there.

Peter Federico, President, CEO, and CIO

Sure. Thanks for the question. I anticipated this would be one of the first inquiries. I'll begin with the outlook regarding ROE and spreads. As you noted, spreads have tightened significantly. To describe the current environment, particularly what occurred in the fourth quarter, mortgage spreads have now transitioned into a new range. We surpassed the levels that we discussed for a long time, a range that remained stable for nearly three years, which has positively impacted our business and contributed to the excellent results we achieved over the past two years, particularly in 2025. As I consider the current coupon spreads against a mix of swap and treasury rates, I generally look across the curve. I would estimate the potential spread for current coupons to swaps is between 120 and 160 basis points, and we are currently around the midpoint of that range, perhaps slightly above it, around 135. I’m not sure of the exact figure this morning. For current coupon rates relative to treasuries, I estimate it to be in the 90 to 130 basis point range, with the current number likely around 110 across the curve. Given this, we prefer swaps in this environment due to the increased stability in swap spreads compared to early 2026, allowing us to utilize swaps more heavily than before—we were previously at 70% and could increase that. With spreads around 130, and considering our typical leverage, returns at the current spread range could be expected in the 13 to 15 percent range, possibly slightly higher depending on the hedge mix. This suggests ROEs that are competitive and align well with our dividend. Regarding the dividend, several factors are always in play. We typically discuss the sustainability of the dividend and the marginal returns that influence it, which is critical as these new marginal returns will drive our long-term dividend, though this process will unfold over years as our portfolio gradually runs off. The prepayment speed on our portfolio and our strategies for repositioning it and growing our capital base will affect this. Therefore, this is a longer-term consideration. When examining our current dividend coverage, it’s important to assess the return on our existing portfolio. We have successfully established an attractive returning portfolio in the prevailing spread environment over the last few years. For instance, if we normalize our net spread and dollar roll income for this quarter, it was $0.35, with a $0.01 drag from nonrecurring performance-related compensation, resulting in $0.36. Relative to our book value of $8.88, this represents an ROE of 16%, which aligns well with our total cost of capital, calculated at about 15.8% at year-end when considering all common and preferred stock dividends and normalized operating costs. This indicates that our total cost of capital is well matched with the existing portfolio. The new portfolio also appears attractive at mid-teens, though this will require time to realize. Other factors also come into play, which we frequently discuss. As I mentioned earlier, we're experiencing a dynamic spread environment with a lot of information forthcoming in the weeks, months, and potentially quarters ahead that will affect the direction and stability of mortgage spreads, which will influence our leverage. The hedge mix will be a vital factor as well, along with accounting considerations. REITs must consider dividend distribution requirements based on taxable income, a factor we must consider in our long-term planning. Overall, many factors are at play, but I believe our dividend aligns with the current economics and accounting of our business.

Bose George, Analyst

The existing portfolio appears to adequately support the dividend. However, for the incremental portfolio, it seems reasonable to suggest that its coverage may be slightly reduced since the incremental returns are in the 13% to 15% range, compared to the breakeven return on equity, which is around 15.5%.

Peter Federico, President, CEO, and CIO

Yes, that's correct. It's important to consider that when deploying new capital, the required return on new capital raised is not the total cost of capital, which applies to the existing business portfolio. A more relevant comparison for assessing dividend coverage is the dividend yield of our stock, which is around 12%. Currently, returns in the marketplace, which I mentioned are around 13% to 15%, exceed our dividend yield, providing ample coverage from that perspective.

Operator, Operator

The next question comes from Doug Harter with UBS.

Douglas Harter, Analyst

I appreciate the ranges for spreads you gave. Can you talk about how you're thinking about the risk or the potential benefit that could get you either to the high end or the low end of those ranges and how that informs your decision around leverage today?

Peter Federico, President, CEO, and CIO

Yes, that's a great question. The announcement early this year that the GSEs would fully utilize their portfolio capacity significantly influenced the current coupon spread. The market was already aware that the GSEs were expanding their portfolios, which they have been doing since the latter half of last year. By November, they had increased their balance sheet by roughly $50 billion in mortgages, totaling around $70 billion since the lowest point. Freddie Mac recently reported adding another $15 billion in MBS for December. The market anticipated this growth, and that announcement clarified their intentions, which tightened spreads considerably. Moving forward, I think it's possible that spreads may remain stable for a while as we await further actions from the administration and the FHFA. There are various measures that could tighten spreads, such as adjusting their portfolio cap, which might not require congressional approval. Changing the Fed's balance sheet dynamics with a new Chairman in 2026 could also play a role. Currently, the GSEs, backed by the government, are purchasing $200 billion in mortgages while the Fed is offsetting that by running off a similar amount. If that changes, it could significantly impact the market. While there have been talks about altering capital requirements for the GSEs, it has not been widely discussed. The funding market shows promise, and potential changes from the Fed could positively influence the Agency market. On the downside, proposals like streamlined refinances or changes in G-fees might have negative effects, particularly on mortgage spreads due to accelerated prepayment risks. Overall, the government appears focused on increasing mortgage affordability, which could stabilize spreads at these levels. As a leveraged investor, we're seeking stability in spreads, which is essential for generating attractive returns, and I believe there could still be positive actions taken for the market.

Douglas Harter, Analyst

And then how do you think about what that means for leverage kind of given that are you kind of comfortable in the current range? It ticked down kind of during the quarter, but the average was flat. How should we think about that?

Peter Federico, President, CEO, and CIO

Yes, that's really important. We have allowed our leverage to decrease in line with the tightening of spreads. At this moment, we need more information to decide if we are ready to adopt a different leverage strategy. A key factor in this decision is our confidence in the stability of spreads. We are considering what actions the government might take and whether those actions will result in increased stability for spreads. We want to know if these measures will be sustainable or if they will only provide temporary relief, such as a quick tightening of mortgage spreads. There are steps they could take that might tighten mortgage spreads by an additional 15 basis points. However, if no further actions are implemented, spreads may widen again. For instance, if the government-sponsored enterprises exhaust their capacity rapidly, mortgage spreads might be tight during that period. Once they reach their limit, mortgage prices will likely return to previous levels. Therefore, we are seeking more clarity on the potential actions they may take and whether those will foster stability in spreads. Ensuring that spreads remain at these levels, which are much more appealing for homeowners than they were a year ago, would be highly beneficial for the overall mortgage market in terms of affordability.

Operator, Operator

The next question comes from Crispin Love with Piper Sandler.

Crispin Love, Analyst

Peter, as you mentioned, the administration is very focused on affordability, lower mortgage rates. But supply here may be the major issue to broader affordability easing. And you did mention in the prior question, some of the things that could be in the toolkit for the administration, FHFA that could be positive for spreads. But if you were in their shoes, what would you do to address the affordability questions?

Peter Federico, President, CEO, and CIO

I believe they have accomplished a lot already and deserve significant recognition for the actions taken in 2025 by the administration, FHFA, and the GSEs. This includes the guiding principles set forth, particularly by the Treasury, which the Secretary frequently references. Their focus on mortgage spreads and the Secretary's emphasis on maintaining or tightening spread stability is crucial to why mortgage rates have tightened considerably. This approach is vital for the market as it enables more participants to enter. Achieving greater spread stability can attract more investors and create a more varied demand for agency mortgage-backed securities, reducing pressure on the GSEs. The guidance provided, along with the actions of the GSEs, has been very beneficial. They can take further steps, such as implementing a cap, which would enhance their capacity and help maintain these attractive spread levels. It's essential for them to keep their attention on mortgage market stability, and they are doing an excellent job in this regard.

Crispin Love, Analyst

Great. That's helpful. And then just one follow-up on the leverage question. Your view seems to be constructive on overall agency MBS investment environment, less rate fall and accommodative administration. Of course, there's always a risk of widening and something unforeseen. But how would you gauge your positivity on the investing environment right now for Agency MBS versus a quarter ago, 6 months, a year ago and how that might impact leverage? And if you do wait for something, could it be almost too late?

Peter Federico, President, CEO, and CIO

Yes, I've mentioned a few points already, but I'll elaborate further because it's a relevant follow-up question. Looking at the current mortgage market compared to a year, two years, or three years ago, we find ourselves in a lower spread environment today, yet it's still wide by historical standards. The returns we are discussing, in the mid-teens, particularly low to mid-teens, are remarkable, especially when compared to what you can achieve in the marketplace. For instance, consider the performance of our stock relative to the S&P 500 or even the NASDAQ last year; the returns are impressive. Despite the lower spreads, returns remain excellent from a shareholder's perspective. A key positive development is that, when reflecting on the market conditions from a year or two years ago, there was significantly more uncertainty regarding the upper end of the range. Today, the decision-makers and policymakers have established clearer limits on the upside. They aim for spreads to remain stable or decrease. If mortgage rates were to rise towards the upper end of the range, I believe we would see actions taken to bring them back down. This clarity about the upper end of the range is a crucial and positive factor for leveraged investors like us, and it is certainly more certain today than it was a year ago. I would anticipate that measures would be taken in response to any external event that might significantly widen spreads.

Operator, Operator

The next question comes from Trevor Cranston with Citizens JMP.

Trevor Cranston, Analyst

You talked a bit about swap spreads and increasing the amount of swaps in the portfolio during the fourth quarter. I was wondering if you could give us an update on your view going forward if you think there's room for spreads to continue widening in the swap market and sort of where you think ultimately those settle out?

Peter Federico, President, CEO, and CIO

Yes, I believe that swap spreads will likely remain in this range, but there is potential for further widening as the year progresses. The Fed is shifting its focus from quantitative tightening to managing reserves, which is a significant change. They've eased some regulatory requirements that the market had anticipated, which is positive for the long term. This makes treasuries more favorable from a balance sheet perspective, contributing to some widening of swap spreads. Overall, the funding market is now in a much stronger position, with the Fed increasing its balance sheet by $40 billion a month. It's uncertain how long this will continue, but they are adding reserves to the system, which recently dropped below $3 trillion but is now back at or above that level. I expect this trend to persist, which I believe will exert widening pressure on mortgage spreads. From a hedging perspective, we should benefit more from a swap-based hedge compared to a treasury-based hedge for a while. Even if the spreads remain stable, we can gain an additional 25 or 30 basis points in carry, which is significant leverage, around 6x to 7x, translating to an extra 1% to 2% in return on equity. Therefore, my outlook for swap spreads is positive.

Trevor Cranston, Analyst

Yes. Okay. That makes sense. And then on MBS spreads, you talked about the positive technicals in the market, which have been pretty strong. I guess the other thing that's obviously helped MBS performance over the last several months has been volatility continuing to drop. So I was curious if we could get your thoughts on volatility going forward, if you think that continues to come down or what your thoughts are around that?

Peter Federico, President, CEO, and CIO

You're absolutely right. A key factor in the strong performance of our asset class in 2025 was the decrease in interest rate volatility. Everyone knows that when interest rate volatility rises, it negatively impacts those holding mortgage-backed securities by altering the optionality profile from a borrower's perspective. Conversely, a decline in interest rate volatility, like we've seen, is beneficial for mortgage bonds. In the fourth quarter, the tenure traded within a narrow 25 basis point range, indicating very little daily movement. Looking back over the year, starting from February of last year, we were in about a 50 basis point range. This stability can be attributed to the administration and the treasury's focus on maintaining longer-term rates. The 10-year rate has been a significant point of attention, and I believe they will continue to manage their issuance in a way that supports the 10-year rate. Currently, we've been trading in the 4 to 4.25 range. Going forward, I expect interest rate volatility to remain generally low, although it may not be as low as it has been, especially given some current geopolitical risks. However, from the treasury's viewpoint, the overall direction of interest rates is more likely to trend lower than higher due to their focus on affordability. If the 10-year does decrease to around 4 or slightly below, I anticipate it will be a gradual decline. Overall, I expect the volatility environment to be favorable for Agency MBS in 2026 based on the information we have today.

Operator, Operator

The next question comes from Jason Stewart with Compass Point.

Jason Stewart, Analyst

Just 2 quick follow-ups. One on capital activity today. Could you give us an update on equity issuance?

Peter Federico, President, CEO, and CIO

You mean quarter to date? This quarter to date?

Jason Stewart, Analyst

Correct.

Peter Federico, President, CEO, and CIO

None. No issuance.

Jason Stewart, Analyst

Okay. And then in terms of your comments, maybe just tie in sort of expectations for ATM issuance? I mean, obviously, 2025 was a big year with your ROE profile, give us some two cents on that.

Peter Federico, President, CEO, and CIO

Yes. It was a great environment, a sort of a confluence of positive factors because we could obviously issue it very accretively and we could deploy it at really attractive return levels. Now we can still issue it accretively, and so that's a positive factor going forward. But obviously, the return profile is not quite as attractive as it was. But as I mentioned, it still exceeds the threshold. So it's something that we will continue to do. But I would also say sort of that we're certainly very comfortable with our size and our scale and our liquidity. Also, there's no urgency on our part to feel like we need to grow. The decision to issue capital will be just based solely on the economics that we see in the environment. So we're certainly very happy with our size and scale and liquidity and like where we are today.

Operator, Operator

The next question comes from the MBS market, we've talked a lot about demand from the GSEs. But outside of the GSEs, when we think about traditional buyers, banks, as rates are going down, and there's been a little bit more mixed activity in terms of foreign demand. What's your take on how those 2 buyers evolve over the course of the next 12 months?

Peter Federico, President, CEO, and CIO

Yes. Looking at the market, the supply outlook is expected to remain similar to current levels. If interest rates decrease and we experience increased refinancing, these figures may change. The private sector will need to absorb about $400 billion of supply, and the GSEs are expected to take up $200 billion, which is significant. They could absorb a substantial portion of that supply, which would be beneficial. However, aside from the GSEs, it's important to note that today’s market is different from that of a year or two ago, which was primarily influenced by money managers. Currently, the demand for mortgages is coming from a more diverse group of investors, which is positive for the market overall. Given the current returns in the equity market and the administration's focus on long-term rates, I believe bond fund inflows will remain strong, similar to last year's approximately $500 billion and the previous year's $450 billion. I anticipate that bond fund inflows will continue at a robust pace, leading to money managers purchasing between $100 billion and $200 billion of mortgages. Both money managers and GSEs could consume a large part of the production. Banks are gradually increasing their positions, and I expect the regulatory changes anticipated in 2026 will benefit MBS and mortgage risk. I foresee banks purchasing more than $50 billion, which aligns with most projections. Foreign demand has remained stable, but I see potential for improvement as the situation appears better than in the past couple of years. Additionally, REITs significantly contributed to the mortgage market in 2025, and I believe their demand will remain strong. Overall, when you consider all forms of demand, it's reasonable to envision a scenario where demand exceeds supply in 2026.

Operator, Operator

The next question comes from Rick Shane with JPMorgan.

Richard Shane, Analyst

I need to buzz in one question before Jason. He really covered my topics. But just one quick clarification. It sounds like you guys are slowing issuance given the incremental return on deployed capital, which makes sense. You also said in response to Jason that you hadn't issued any equity through the ATM quarter-to-date. I am curious was that actually by choice, or are you blacked out on the ATM until you issue earnings just so we understand really how much you're dialing back if it was a function of what you're allowed to do versus what you've chosen to do?

Peter Federico, President, CEO, and CIO

Well, that's a good clarification. I would say two things that I would describe my answer to the future issuance as being opportunistic and driven not by any desire to be larger or have greater scale, but just driven by the economics of the opportunity in terms of the value to our existing shareholders. And then from a quarter-to-date perspective, most companies, I think you will find in a blackout period from the end of the previous period to sometime around their earnings call. So that would be a typical pattern for companies to not know......

Operator, Operator

The next question comes from Eric Hagen with BTIG.

Eric Hagen, Analyst

I just want to get your perspective on prepayment speeds, maybe at what level for mortgage rates do you think really gets the refi market moving? And would you guys modify the hedging in any way or take off some of the longer-dated hedges, if it looked like refis were really going to accelerate?

Peter Federico, President, CEO, and CIO

Let me begin with a few points before we move to follow-up questions. Currently, the risk of prepayment is higher, especially considering the current direction of the administration. The composition of our portfolio will be vital for mortgage performance moving forward. In a tighter spread environment, the selection of assets becomes increasingly critical. It’s essential to consider the assets we choose and those we avoid. The makeup of the coupon will be significant, along with the characteristics within our pools. For instance, regarding our position in 5.5 and above, about 48% of our portfolio falls into this category. Notably, 87% of this segment possesses underlying attributes that we believe will stabilize cash flows. This is crucial when evaluating the characteristics based on the channel, credit, geography, and factors like GSE pricing—all of which can significantly impact performance in the future. The specific pool characteristics we select will be important. Chris and I reviewed some data earlier today that caught my attention. For our 6.5 population, which is only 5% of our portfolio, the cheapest to deliver cohort is experiencing a 52% CPR. In comparison, our overall portfolio is trading at below half of that CPR. The underlying characteristics and coupon composition will be key drivers going forward. Additionally, from an interest rate and hedging viewpoint, maintaining a positive duration gap is essential. As rates decrease, mortgages face challenges that could affect the supply outlook. Therefore, a positive duration gap is crucial. You may also notice that we have a significant receiver swaption position, which will provide us with some added protection. Overall, how we position our portfolio in terms of hedging, maintaining a positive duration gap using options, and selecting pools with desirable characteristics should help us navigate this rising prepayment environment.

Operator, Operator

And our last question comes from the line of Harsh Hemnani with Green Street.

Harsh Hemnani, Analyst

So as we look at the composition of the mortgage market, it's more barbelled today versus what it was over its history. And in the context of the PAR coupon being close to 5%, the coupons at 4% and 5%, there's less outstanding there versus in higher coupons and lower coupons. And then also, it sounds like from the messaging from the administration, GSE purchases are going to come in at those PAR coupons. How is that environment sort of affecting your ability to, first off, pick pools in this environment where there's less outstanding at the coupons you favored and then also deploy capital into those coupons?

Peter Federico, President, CEO, and CIO

Yes, I understand that. You're correct. One important point we've discussed is that I believe the GSEs will make decisions based on the mortgage market's economics, and I anticipate their purchasing will primarily focus on the PAR coupon since that has the most significant effect on the primary mortgage rate they aim to influence. For instance, looking at the performance across the coupon stack so far this quarter, the 5% coupon has tightened by about 15 basis points, while the rest of the coupon stack, including our portfolio, has seen an average change of around 5 basis points, as the other coupons have not shifted as significantly. Overall, this isn't particularly challenging for us. We have substantial liquidity across these coupons, especially in the lower ones and some intermediate ones. There is enough liquidity in the $9 trillion market for us to move into various coupons, including 4s and 4.5s, where we currently hold a considerable position. Thus, we have ample liquidity to adjust our portfolio however we wish regarding coupon distribution. I expect the current coupon will draw the most attention from an external standpoint.

Harsh Hemnani, Analyst

Got it. That's helpful. And then maybe on the duration gap, you touched on this a little bit. It's been growing for the past few quarters, and it adds that downgrade protection in an environment where prepayment risks are elevated. How should we expect that to evolve over the coming quarters? And then what's the boundaries around that, that we should be thinking about?

Peter Federico, President, CEO, and CIO

Yes, you're correct. At the end of the quarter, our duration gap was approximately 0.3 to 0.4 years. Currently, it's larger due to the 10-year yield increasing. Right now, it's about half a year, slightly above 0.4 from the end of the last quarter, and possibly around 0.5 this morning. With the 10-year rate now around 420 or slightly higher, if it remains at this level or goes a bit higher, I expect our duration gap will widen further as the risk of lower rates increases. I don’t anticipate the 10-year to rise much beyond 435, but there is some risk it could drop back down to closer to 4%. Typically, our duration gap operates historically in the range of about half a year, somewhere between a quarter and three-quarters of a year.

Operator, Operator

We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.

Peter Federico, President, CEO, and CIO

Great. Thank you, operator, and thank you, everyone, again, for participating. We're obviously very pleased to be able to deliver outstanding results for our shareholders in 2025, and we look forward to 2026 in the environment that we're in and look forward to speaking to you again at the end of the first quarter. Thank you.

Operator, Operator

Thank you for joining the call. You may now disconnect.